Ethics vs. Ethos in US and UK Megabanking

30 Pages Posted: 11 Jun 2016 Last revised: 4 May 2017

See all articles by Edward J. Kane

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: May 1, 2017

Abstract

Company law in the US and UK fails to acknowledge that authorities’ propensity to rescue giant banks from the consequences of insolvency creates an implicit contract that assigns taxpayers a coerced and badly structured equity stake in too-big-to-fail institutions. The entrenched managerial norm of maximizing stockholder value abuses this stake. It does so by lending an undeserved moral legitimacy to efforts by TBTF managers to take on dangerous levels of tail risk because their bank’s deep downside is effectively eliminated by the prospect of unlimited taxpayer support. Conventional tools of prudential regulation constrain but do not de-legitimate this behavior. To accomplish that end, this paper calls for: (1) a formal recognition of the fiduciary duties and dividends that TBTF firms owe to taxpayers and (2) criminalizing aggressive pursuit of safety-net subsidies as a form of public endangerment.

Keywords: Too big to fail, Financial regulation, Financial crisis, Regulatory culture, Financial stability

JEL Classification: A14, E58, G20, G38

Suggested Citation

Kane, Edward J., Ethics vs. Ethos in US and UK Megabanking (May 1, 2017). Institute for New Economic Thinking Working Paper Series No. 43. Available at SSRN: https://ssrn.com/abstract=2793387 or http://dx.doi.org/10.2139/ssrn.2793387

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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